Key Terms

We’ve included a Glossary of KEY TERMS that you will see or hear when people write or talk about bankruptcy. These terms are often highlighted in this Guide and linked to this page so you may keep coming back to check their meanings. A click on the arrow next to each term will show you the definition (but you’ve probably already figured that out.)

AUTOMATIC STAY:

A restraining order against your creditors which takes effect immediately and automatically when you file a petition under the bankruptcy laws. In most cases this stops bill collectors from bothering you. It also stops lawsuits, foreclosures, even the IRS; and it creates a cooling off period while the court system sorts things out. It is not permanent and in some cases creditors may be given relief from the automatic stay to seize collateral that you will not keep or cannot afford after bankruptcy.

BANKRUPTCY SCHEDULES:

Detailed lists filed by the debtor along with (or shortly after filing) the petition showing the debtor’s assets, debts, and other financial information. There are official forms for these Schedules that debtors must use.

BAPCPA:

This stands for the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Commonly referred to as the “New Bankruptcy Law”, BAPCPA attempts to, among other things, make it more difficult for some consumers to file bankruptcy under Chapter 7, but some of these consumers may instead utilize Chapter 13.

CERTIFIED BANKRUPTCY SPECIALIST:

California has a legal certification program for Bankruptcy Specialists (as well as 10 other areas of law) that is designed to protect the public. This program requires attorneys to demonstrate high competence and experience through testing and evaluations in bankruptcy by an objective certification panel. More information is available to consumers at the California State Bar website.

CHAPTER 7:

The Chapter of the Bankruptcy Code that provides a procedure for debtors to receive a discharge from their debts and get a “fresh start.” As part of this procedure, the debtor gets to keep exempt (protected) property but must give up non-exempt (unprotected) property. The unprotected property is sold (liquidated) by the trustee and this is why this Chapter is often referred to as a “liquidation.”

CHAPTER 13:

The chapter of the Bankruptcy Code provides a system and rules for the adjustment of debts of individuals with regular income. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.

CONSUMER DEBTS:

Debts incurred for personal, family or household needs as opposed to business needs.

CURRENT MONTHLY INCOME (CMI):

The average monthly income of the debtor over the six calendar months before the filing of the bankruptcy case. This includes regular contributions to household expenses from nondebtors and income from the debtor’s spouse if the petition is a joint petition. But it does not include social security income and certain other payments made because the debtor is the victim of certain crimes.

DEBTOR:

In consumer cases, this is the individual (or “human”) that files bankruptcy. A husband and wife may file a single petition as “joint debtors.”

DENIAL OF DISCHARGE:

An order from the bankruptcy court that denies the relief from debts normally given in a discharge.

DISCHARGE:

A permanent order from the bankruptcy court enjoining creditors from trying ever again to collect on a debt that has been properly disclosed and is subject to discharge in your bankruptcy case. This order acts as a “release” from personal liability from these debts. Most debts are “dischargeable” in your case and will be subject to the DISCHARGE order, but there are some exceptions. In cases of abuse, it is possible for the bankruptcy court to bar or deny your DISCHARGE, so complying with the law and avoiding pre-bankruptcy or post-bankruptcy abuse of the laws is crucial.

DISMISSAL:

An order from the bankruptcy court that dismisses your bankruptcy case. If your case is dismissed, there may be negative consequences in your later bankruptcy case if you choose to re-file a petition.

EXEMPTIONS:

Bankruptcy exemptions determine what property you get to keep in a Chapter 7 case, whether it is your home, car, pension, personal belongings, or other property. If property is “exempt,” you may keep it during and after bankruptcy. If property is non-exempt, the trustee is entitled to sell it to pay your unsecured creditors. In Chapter 13, exemptions help determine how much you will have to pay to unsecured creditors through your Chapter 13 plan.

Figuring out which bankruptcy exemptions to use and how to use them is one of the most challenging parts of filing for bankruptcy because bankruptcy law is a confusing mixture of federal and state law. Each state has a set of exemptions that apply in bankruptcy. Most states require you to use those state exemptions. However, seventeen states allow debtors to choose between the state exemption system and another set of exemptions created by Congress, called the federal bankruptcy exemptions. California is unique in that it has two sets of state exemptions that debtors may choose from. If you have a choice of exemption systems, you must choose one system or the other. You cannot mix and match.

FRAUDULENT TRANSFERS:

Title or ownership transfers or gifts of assets made be debtors before bankruptcy that are deemed unfair or that were made in an attempt to hide assets or remove assets from the reach of your creditors. The trustee in your bankruptcy case has the power to sue you and the people that received these transfers (using bankruptcy law and state laws). The trustee is allowed to get the assets back or get a money judgment for the value of the assets you attempted to remove from your creditors grasp. And if this occurs, you will also lose the right to claim any exemptions to protect value in these assets if those exemptions were available to you.

HYPOTHETICAL LIVING EXPENSES:

A combination of national and local expense standards updated annually from statistics and calculations published by the IRS. These hypothetical expenses are complicated and they are part of the calculations your bankruptcy attorney (or the court) must use in applying the Means Test to your circumstances to determine how much leftover or net income you have. But note that these expenses are “hypothetical” so they could be accurate to your circumstances or above or below your actual expenses by category. This is one of the reasons that practitioners consider the Means Test to be unfair and arbitrary. You can find the standards that will apply to you at the website maintained by the Department of Justice and the United States Trustee program.

MEANS TEST:

A calculation required by the bankruptcy law that is meant to determine if a Chapter 7 filing is presumed to be an abuse of the law. If you can’t pass the Means Test, your bankruptcy is dismissed or you have the option to continue in Chapter 13.

The Means Test calculation begins by combining a person’s real living expenses with certain hypothetical living expenses. The combined real and hypothetical expenses are then subtracted from a person’s “current monthly income” to see if there is any “projected disposable income” left over to pay creditors. If there would be any leftover income, the law says abuse is presumed if the “leftover” amount is enough to pay general creditors during a 60 month time period: (a) $11,075; or (b) 25% of the debts or $7,725, whichever is greater.

MEDIAN INCOME:

A standard of income used in the Means Test that is determined on a regional basis from Federal Census data. The Median Income that applies to your case will depend on the circumstances of your case, such as the number of earners and size of household. The actual tables for the income levels may be found at the website maintained by the Department of Justice and the United States Trustee program.

NON-EXEMPT ASSETS:

Assets that are not protected in bankruptcy. If these assets have value, they may be taken by the Trustee and sold in order to raise money to pay creditors. Value includes “net value” or “equity” over and above the liens on the asset.

PETITION:

The initial court paper, combined with schedules and other documents, which is filed to begin a case under the bankruptcy laws. It is your official request to the court for help in resolving your debt problems.

PLAN:

In Chapter 13, the plan is a debtor’s detailed description of how the debtor proposes to pay creditors’ claims over a fixed period of time, usually three to five years.

PRE-BANKRUPTCY PLANNING:

The arrangement (or rearrangement) of a debtor’s property to allow the debtor to take maximum advantage of exemptions. Prebankruptcy planning typically includes converting nonexempt assets into exempt assets when this is allowed by law. This planning should be done with a certified bankruptcy specialist.

PREFERENTIAL TRANSFERS:

Certain payments or other transfers of property to creditors that occur prior to bankruptcy, but within the “preference periods” provided by law. The normal preference period is 90 days, but a one year preference period applies to relatives or “insiders” of the debtor. There is a complex set of rules that applies to preferences and not all transfers or payments within the time periods will result in a “preference.”

PROJECTED DISPOSABLE INCOME:

This is a calculation that is part of the Means Test to determine eligibility to file Chapter 7 and to avoid a determination of “abuse.” It is the amount of money left over after subtracting a combination of real and hypothetical living expenses from the debtors Current Monthly Income (CMI).

REAFFIRMATION:

An agreement between a Chapter 7 debtor to continue paying a dischargeable debt (such as an auto loan) after the bankruptcy, usually for the purpose of keeping collateral (i.e. the car) that would otherwise be subject to repossession. There are special rules that apply to how these agreements may be properly entered into and courts tend to disfavor them since they go against the basic bankruptcy premise of a “fresh start.”

REORGANIZATION

In consumer cases, a Chapter 13 case that allows debtors with regular income to adjust debts, keep property and pay the adjusted debts over time, usually three to five years.

TRUSTEE:

The representative of the bankruptcy estate who exercises legal powers, principally for the benefit of the unsecured creditors, under the general supervision of the court. The trustee is appointed and supervised by the U.S. trustee or bankruptcy administrator.

The trustee is a private individual appointed in all Chapter 7 and Chapter 13 cases. The trustee’s responsibilities include reviewing the debtor’s petition and schedules and bringing actions against creditors or the debtor to recover property of the bankruptcy estate. In Chapter 7, the trustee sells property of the estate and makes distributions to creditors. Trustees in Chapter 13 have similar duties to a Chapter 7 trustee and the additional responsibilities of overseeing the debtor’s Reorganization plan, receiving payments from debtors, and disbursing plan payments to creditors.

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